Problem 2 Difference-in-Difference In the beginning of 2005, Minnesota increased the sales tax on alcohol. Suppose you are interested in studying the effect of the increase in sale taxes on alcohol on the number of car accidents due to drinking in Minnesota. Unlike Minnesota, Wisconsin did not change the sales tax on alcohol. You decide to use a Difference-in-difference (DID) Model. The numbers of car accidents in each state at the end of 2004 and 2005 are as follows: Year Number of car accidents in Minnesota Number of car accidents in Wisconsin 2004 2000 2500 2005 2500 3500 a. Which state is the treatment state and which state is the control state? (10 points) b. What is the change in the outcome for the treatment group between 2004 and 2005? (5 points) C. Can we interpret the change in the outcome for the treatment group between 2004 and 2005 as the causal effect of the policy on car accidents? Explain your answer. (10 points) d. What is the change in the outcome for the control group between 2004 and 2005? (5 points) e. f. What is the difference in difference estimate and how do you interpret it? (10 points) In the context of this problem, state the assumption required to interpret the Difference-in-Difference estimate as the causal effect of the policy. (5 points)
Problem 2 Difference-in-Difference In the beginning of 2005, Minnesota increased the sales tax on alcohol. Suppose you are interested in studying the effect of the increase in sale taxes on alcohol on the number of car accidents due to drinking in Minnesota. Unlike Minnesota, Wisconsin did not change the sales tax on alcohol. You decide to use a Difference-in-difference (DID) Model. The numbers of car accidents in each state at the end of 2004 and 2005 are as follows: Year Number of car accidents in Minnesota Number of car accidents in Wisconsin 2004 2000 2500 2005 2500 3500 a. Which state is the treatment state and which state is the control state? (10 points) b. What is the change in the outcome for the treatment group between 2004 and 2005? (5 points) C. Can we interpret the change in the outcome for the treatment group between 2004 and 2005 as the causal effect of the policy on car accidents? Explain your answer. (10 points) d. What is the change in the outcome for the control group between 2004 and 2005? (5 points) e. f. What is the difference in difference estimate and how do you interpret it? (10 points) In the context of this problem, state the assumption required to interpret the Difference-in-Difference estimate as the causal effect of the policy. (5 points)
Chapter9: Public Finance And Public Choice
Section: Chapter Questions
Problem 7P
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Question
Transcribed Image Text:Problem 2
Difference-in-Difference
In the beginning of 2005, Minnesota increased the sales tax on alcohol. Suppose you are
interested in studying the effect of the increase in sale taxes on alcohol on the number of car
accidents due to drinking in Minnesota. Unlike Minnesota, Wisconsin did not change the
sales tax on alcohol. You decide to use a Difference-in-difference (DID) Model. The numbers
of car accidents in each state at the end of 2004 and 2005 are as follows:
Year
Number of car
accidents in Minnesota
Number of car
accidents in Wisconsin
2004
2000
2500
2005
2500
3500
a. Which state is the treatment state and which state is the control state? (10 points)
b. What is the change in the outcome for the treatment group between 2004 and 2005?
(5 points)
C. Can we interpret the change in the outcome for the treatment group between 2004
and 2005 as the causal effect of the policy on car accidents? Explain your answer. (10
points)
d. What is the change in the outcome for the control group between 2004 and 2005? (5
points)
e.
f.
What is the difference in difference estimate and how do you interpret it? (10 points)
In the context of this problem, state the assumption required to interpret the
Difference-in-Difference estimate as the causal effect of the policy. (5 points)
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